Tuesday, November 9, 2010

Stressing the risks of Fed 'pump priming,' Mrs. Palin zeroed in on the connection between a 'weak dollar—a direct result of the Fed's decision to dump more dollars onto the market'—and rising oil and food prices. She also noted the rising world alarm about the Fed's actions, which by now includes blunt comments by Germany, Brazil, China and most of Asia, among many others.

...

Mr. Zoellick, who worked at the Treasury under James Baker in the 1980s, laid out an agenda for a new global monetary regime to reduce currency turmoil and spur growth: "This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves toward internalization and then an open capital account," he wrote, in an echo of what we've been saying for some time.

And here's Mr. Zoellick's sound-money kicker: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." Mr. Zoellick's last observation will not be news to investors, who have traded gold up to $1,400 an ounce, its highest level in real terms since the 1970s, as a hedge against the risk of future inflation.

"the demand for any commodity is a function of the supply of noncompeting commodities."

Within this context, think of dollars as a commodity with few competitors. As a result, the "demand for dollars" will go up if the supply of dollars goes up. This "demand for dollars" is what we commonly call the price tag on each of those noncompeting commodities. This is why debasing the currency/printing money/quantitative easing is inflationary.

Within the context of Zoellick's proposed international system the price of gold in competing international currencies would reflect the current and anticipated supply of each currency versus the growth in the supply of gold. The supply of gold is constrained by mining and processing costs, so it would be a barometer for the paper alternatives.

2 comments:

What's interesting is that one official agreed that there's a problem with the present system (!), but worried about going towards gold, that " it would not be practical to use modern monetary policy tools in a system that was "based on a commodity whose availability is dictated by natural conditions.""

By 'natural conditions' he means, of course, reality.

Can't have that! How would govt's get to do whatever the heck they want to do if you have to keep worrying about reality!